Indexing: Passive Investing Movement Gains Momentum

What do Charles Schwab, Warren Buffett, Jim Cramer, Larry Fink, Ben Stein and John Bogle have in common?

Shoe size, maybe? No, they all think that most Americans, up to 98% of us, should be using index funds to build a retirement nest egg .

Schwab appears to be the most recent convert to the passive approach, telling reporters that tracking the indexes is far better than stock picking , even better than manager picking. “There’s somebody out there, I know, who can pick the best managers. It may not be me,” Schwab said. “That’s why I stick to index funds.”

You might find Schwab’s candor a bit dumbfounding at first. After all, isn’t he in the business of telling people how to “win” at investing? Hasn’t the message been that trading is the way to go?

Sure, but he’s also a smart businessman who knows how to talk up his own book. And that book of business increasingly is to promote passive investing through portfolio management services, not hotshot online trading tools.

In a real sense, we’ve come full circle from the early, go-go days of Internet trading. You remember the nonstop TV ads, some of which still run. Babies making trades with cellphones. Hip young billionaires flying around in helicopters. Even parodies of hip, helicopter-riding billionaires.

As businesses go, online trading had a good run. Now, hyper-efficient high-frequency players have squeezed the slow-lane Internet traders right off the road. If you’re still day trading from a home computer, it’s way past time to stop.

A few small, high-end trading services are still out there, catering to that 2% of investors who think they’ve got an edge on Wall Street and the few thousand individual money managers who work for them. They’re deluded, but it’s a free world.

Madder than ever

That leaves behind 98%, the balance of investors who very much should avoid the siren call of trading.

Right about now you might be thinking, Jim Cramer? The “Mad Money” guy? Yes, indeed. Here’s a key quote from his book Stay Mad for Life , on page 126:

“The job of an index fund manager is simply to make sure the fund matches the index. These funds are universally cheaper than actively managed funds, and any index fund will consistently beat the vast majority of mutual funds, if only because the fees are so much lower.”

Yes, Cramer advocates stock picking on TV, but when asked directly he falls back on the Schwab argument, that trading and manager picking is reasonable for a select few but not for most people and definitely not for anyone who has other things to do in life, such as focus on a career and raise a family.

A serious approach

What you see among the big brokerage firms such as Schwab, Fidelity and BlackRock is the simple recognition of this fact: The business opportunity in investment management isn’t the tiny fraction of active investors. Commissions are compressed. The cost of trading has fallen like a rock.

No, the real money is that 98% of people who want expertise and guidance on how to minimize risk and ensure that they reach retirement with plenty of savings. Millions upon millions of Americans need exactly this kind of trustworthy guidance, and exceedingly few of them have access to it.

That’s why index mutual fund and exchange-traded fund fees are plummeting, why commissions on those products have fallen to zero and why folks such as Charles Schwab seem to have suddenly gotten religion on passive investing.

Because it’s past time for a serious approach to a serious problem — how to retire safely and on time.